00:00Bob Michael of JPMorgan Asset Management writing, the U.S. economy continues to operate at trend
00:04with continuing disinflation, tax refunds, and AI capex and nice tailwinds. All of this
00:10is good for the bond market. Bob joins us now for more. Bob, good morning.
00:14Happy to be here.
00:14Bond yields, new lows for the year, very close to those levels right now. What's driving yields
00:19that much lower?
00:20I feel that the bond market is sitting here with a growing stack of chips. We're getting all the
00:26chips from private capital and from equities where a lot of investment by clients is gone.
00:32As I talk to our clients, they still feel under-allocated to fixed income. Our message
00:37is come on in. We're great. We're the perfectly priced market. If I think about the Fed funds
00:43rate at three and five-eighths, I like it. Even if inflation runs at about three percent this year,
00:49you're talking about positive real yields on Fed funds of five-eighths of a percent. You look at
00:54the two-year Treasury. It's near the Fed funds rate. That looks pretty good at 340 or so. You've
01:00got about 60 basis points of steepness out to the 10-year. That looks reasonable to us. You're just
01:06over four percent. You look at credit spreads for an economy that continues to expand. With some
01:12tailwinds, they look fair to us.
01:14There's been some doubt, as you know, about how bonds would perform in an equity correction. Are we
01:19beginning to prove the doubt is wrong with recent price action?
01:22I think so. I think we've long talked about the long-end becoming unanchored seemed to have
01:28gotten overdone, that the pain trade for this year was going to be a bullish flattening of the yield
01:33curve. We're starting to see that now. Investors are recognizing they can go into bonds. There is
01:40yield there. It is the counterbalance to risk. When you say go into bonds, you're talking about
01:44Treasuries. You're talking about long-end and you're talking about short-end. Does this rally in
01:49the government bond space mean something bad for the riskier space?
01:54I'm talking about the entire bond market. I think most of the client base that's coming into the
02:00bond market isn't surgically thinking about Treasuries versus credit. They want to buy an
02:06aggregate bond fund, a core plus bond fund, an income fund, a bond opportunities fund. In those
02:12benchmarks, there are going to be a lot of Treasuries, but there's a lot of credit. That money is coming
02:17in and it's buying all sectors of the market. I'm not worried about credit here as long as
02:22recession isn't on the horizon. And right now, recession seems a long way off.
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